Are Markets Fooling Themselves?

Defensive plays have been up. Oil is climbing, gold just pulled above $900, and yet the markets have been clawing higher this week, what gives?

Either things are a whole lot better than anyone expected, or the market’s are fooling themselves.

Losses have been smaller than expected from most of the companies that have reported earnings recently. Now most of them lost money, but they didn’t loose as much as Wall Street thought they would. A few even turned a profit.

On one side you could argue that it’s the result of an improving economy, company cutbacks and belt tightening measures. On the other, you could argue that these firms have been sandbagging the real extent of their damages, or have used tax and accounting rules to make the books look better.

Unfortunately, we believe it’s the latter instead of the former.

While the economy may have bottomed out, corporate earnings are still on the ropes. Regardless, a recovery isn’t going to happen overnight.

What does it mean for investors? It means that we’re going to see churning and volatility continue. As the bankruptcies of GM and Chrysler get closer to reality, we should see their negative impacts affect the markets.

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Comment by Kiwi

2009-04-24 17:26:49

Either consumption will follow the market up or the market will follow consumption down. Comsumption is not driven by stock market prices.
Has the market correctly anticipated a sustained upturn in consumption?
The tail does not wag the dog even if it sometimes looks unclear.

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